SHOULD TENANTS BE ENTITLED TO A REFUND OF RENT AFTER EXERCISING BREAK RIGHT?

The Supreme Court’s judgment in this case will have implications for landlords and tenants. The judgment is awaited but the appeal by M&S was heard earlier this month so below is a reminder of the background to the case, our thoughts on the possible outcome and how landlords and tenants should approach this issue in the meantime.

Marks and Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another

The case concerns the apparently simple question of whether or not M&S, following the termination of its lease by the exercise of a break right, is entitled to a refund of a proportion of the rents paid in advance referable to the period after the break date.

Two principal arguments were put forward in favour of M&S. The first was that the Court should imply a term into the lease entitling M&S to a refund. This would be “in line with the reasonable expectations of the parties” at the time the leases were granted; it was submitted by Counsel for M&S that this  is the correct test for the implication of a term into a contract. Secondly, it was submitted that the law as it currently stands in relation to apportionment of rents and other sums payable in advance is incorrect.

Implied Term?

The Court discussed at length the circumstances in which it is appropriate to imply terms into a contract. Essentially, there is disagreement between the extent to which the correct test should be objective (what the contract seems to have been intended to mean, construed from the express terms and the admissible background facts) or subjective (what the actual parties intended it to mean). It is easier for the Court to interpret ambiguous or incomplete contractual drafting than to imply a completely new term into a contract, and it is not difficult to see why the Court may be reluctant to imply terms unless there is a compelling reason to do so.

On the one hand, if the parties had agreed that the tenant was entitled to a refund, they could easily have set this out in the lease. On the other hand, the parties negotiated a break premium (equivalent to one year’s rent at the original rate) in order to compensate the landlord; why should the landlord benefit from a windfall in the form of excess rent?

Apportionment Act 1870

At common law, rents and other periodical payments are not apportionable. The Apportionment Act 1870 was passed (it seems) to reverse this position. However since the 1900 case of Ellis v Rowbotham, the position at law is that rents payable in advance are not subject to apportionment under the Apportionment Act, which was held to apply only to rents and other sums payable in arrear. Counsel for M&S argued that the 1870 Act was intended to apply to all sums, whether payable in advance or in arrear, and the drafting of the Act could support this interpretation.

Comment

It is tentatively suggested that if the Supreme Court finds in favour of M&S, the decision will be based on overturning the previously accepted interpretation of the Apportionment Act, rather than by implying a term into the lease providing for a proportionate part of the rent to be repaid following the exercise of the break.

The Supreme Court’s judgment is awaited with interest by landlords and tenants alike.  In the meantime, the parties to a lease should set out clearly in the lease what is intended to happen to rents paid in advance on the exercise of a break right, leaving no room for doubt.

EXTENSION OF PERMITTED DEVELOPMENT RIGHTS FOR OFFICE TO RESIDENTIAL USE

The government plans to make permanent the permitted development (PD) rights allowing a change of use from offices to residential which were due to expire in May 2016. In his announcement on 13 October, the housing and planning minister, Brandon Lewis also heralded the government’s plans to extend the current PD regime to allow the demolition of offices and construction of new homes, and to introduce new PD rights for the change of use of light industrial buildings and launderettes to residential use. Those local authorities that are currently exempt from the office to homes PD rights will have until May 2019 to make an Article 4 direction if they intend to continue to determine planning applications for the change of use.

This move will be welcomed by developers, and the detail behind these proposals is awaited with interest.

CONSTRUCTION LAW UPDATE

COURT GUIDANCE ON PAYMENT APPLICATIONS, PAY LESS NOTICES AND LEVYING OR DEDUCTING LIQUIDATED DAMAGES

In August, the Technology and Construction Court provided guidance, in the case of Henia Investments Inc v Beck Interiors Limited, on payment applications, the content of pay less notices and pre-conditions to an employer deducting or claiming liquidated damages (LADs) in the context of a JCT Standard Building Contract (2011 edition).

Key points

A contractor’s application for payment will only be effective if it is clear and unambiguous which due date it relates to.

A pay less notice is not limited to dealing with set offs (such as LADs). It can act as a revaluation by the employer of the works.

Compliance by the contract administrator with the timescales for reviewing a contractor’s application for an extension of time is not a pre-condition to a right to deduct or claim LADs.

Impact

If contractors follow the guidance given by the court, employers should receive applications for payment which clearly identify which due date they relate to. This will make it easier for employers and those assisting them with payment processes to know whether an application has been made in time and when notices responding to that application should be sent to the contractor.

If contractors do not follow contractual requirements and the guidance given by the court, their applications for payment will not be effective and so will not result in any payment being due from the employer.

Employers and those issuing notices on their behalf now have the comfort of knowing that pay less notices which amount to a revaluation of the work are valid.

LADs can be deducted or claimed even if the contract administrator has not responded to an application for an extension of time within the timescales required by the contract. However, contract administrators should still comply with the timescales for dealing with claims for additional time in order to ensure that LADs are not deducted where an extension of time is justified.